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To buy or not to buy? It may be more complicated than you think.

Is now the right time to buy a home instead of renting? Should you sell the home you’re living in and buy another one? The answers to these questions are always a combination of financial and personal priorities, sometimes prompted by a new job or a growing family.

A Buyer's Checklist

If you’re thinking seriously about buying, you’ll want to:

• Evaluate how much you have for a down payment, either from savings or potential profit from the sale of your current home

• Estimate what you can afford to spend by reviewing your budget, consulting with your financial advisers, and comparing the results of several online home-buying calculators—though the calculators may ask for information you don’t have, such as estimated real estate taxes and insurance costs

• Start looking at homes in your price range in areas you have identified as places you’d like to live

Unless you qualify for a Federal Housing Administration (FHA) mortgage, a Department of Veterans Affairs home loan guarantee, assistance through the Community Reinvestment Act (CRA), or another government program—including people buying in rural areas and people with disabilities—you should expect lenders to require a 20% cash down payment. When estimating what you can afford, remember that you have to include real estate taxes, which can vary dramatically from place to place. If you have children, remember that higher real estate taxes may be correlated with a good public school system. So paying higher taxes may be cheaper in the long run than paying for private school. The same is true about proximity to public transportation if you commute. The catch is that good schools and good transportation don’t necessarily go hand-in-hand. In the final analysis, flexibility is key to finding a home that meets your financial and personal needs. So is waiting for the right opportunity.

It's All About Equity

When you make a down payment on a home, that amount determines your equity, or the percentage of the property you actually own. The more you put down, the greater your equity. And, as you pay off the mortgage loan principal, your equity increases. When the loan is fully paid, your equity is 100%, and the home is yours, free and clear.

But there is another factor at work in building equity: the market value of real estate, which changes all the time. That means your equity can increase if the market value of your home increases. But, the reverse is also true. If the market value drops, your equity could shrink, a situation that a large number of homeowners faced during the fiscal crisis starting in 2008.

In a simplified example, assume that a home you bought for $300,000 with a $200,000 mortgage grew in value to $400,000. Your initial equity of 33%(your $100,000 divided by the $300,000 value) would increase to 50% (your $100,000 plus the $100,000 divided by $400,000). That is, you’d owe around $200,000 on a home worth $400,000.

But, if the home’s market value decreased to $250,000, your equity would shrink to 20% if you still owed $200,000. And the value dropped below $200,000, as it could in a serious market downturn, your equity would drop to 0% and you would actually owe more than the home was worth. That’s known as being underwater.

While real estate values don’t change overnight, you don’t pay off a loan’s principal that quickly either. In fact, it takes more than 20 years of a 30-year loan to pay off even half the principal.

The prospect of price changes in the housing market shouldn’t drive you away from buying. The changes often work in your favor. But the potential for a loss in value is worth considering.

The Buying Process

Most homebuyers pay part of a home’s purchase price, called the down payment, in cash, and use a mortgage loan from a bank, credit union, mortgage banker, or other lender to close, or finalize, the purchase. At least six months before you expect to apply for a mortgage loan, you should check your credit report using www.annualcreditreport.com to be sure there are no potential credit problems that might make it harder for a lender to approve your application. If you find a major error that could hurt your creditworthiness, try to have it resolved by following the directions on the credit reporting agency website. Then shop around for the lowest annual percentage rate (APR) being offered for loan term you want. If you already have an account with a potential lender, you’ll want to start there, asking if you would be eligible for a preferred rate.

Asking First

The customary approach to applying for a mortgage is to wait until you find the home you want to buy and then look for a lender. But you may want to investigate preapproval. This means you apply for a mortgage loan before you have chosen a property. The lender will let you know whether or not you’re approved and how much you’ll be able to borrow. Preapproval is often a good idea since you can shop with more confidence when you know how much you can afford to spend. Preapproval can also make you a more attractive buyer, as the seller can be confident that you can get a loan. But there are fees involved, as there are with any loan application, so you don’t want to take this step until you’re serious about buying. Another approach is to seek prequalification. In this case, a mortgage lender confirms that you will probably be approved and for how much but does not make a commitment to lend.